The rooster crowed. The sun came up. The rooster puffed his feathered chest as he beheld his magnificent handiwork.
Phil Berger led the state Senate in cutting taxes. Revenues nudged up, putting the state on course to finish its budget year in the black. Berger proclaimed that the tax cuts had done the trick. One might even say that he crowed.
“Two years ago, when the Republican legislature passed the largest tax cut in state history, Chicken Littles on the left loudly cried North Carolina would lose so much tax revenue that students wouldn’t have teachers, roads wouldn’t be built and our universities might have to close,” said the Senate’s president pro tem.
“But far from starving state government, tax cuts and tax reform have spurred economic growth and job creation – a turnaround that has provided our state with a surplus that will allow us to continue cutting taxes while investing in core priorities like education, infrastructure and public safety.” The good news – and it clearly is good – is that on the strength of April’s pivotal tax collections, North Carolina now can expect revenues for the fiscal year ending June 30 to outstrip expenses by $400 million.
That’s not a huge amount compared with revenues originally forecast to be $21 billion. But after years of spending cuts that have put a painful squeeze on state programs and services – even if the sky hasn’t quite collapsed – nobody’s likely to complain about finding an extra $400 million in the treasury. That’s the case even if the money, as a one-time windfall, isn’t supposed to be used for ongoing, or recurring, expenses.
Still, the picture is more complicated than Berger suggests. Start with the analysis offered by former state budget director Art Pope, who was on duty when the current budget was put together.
Pope holds to the conservative doctrine that lower taxes will accelerate the economy and lead to higher tax collections. But as to when … well, not right away.
“There was never any expectation that tax cuts would pay for themselves during the very next fiscal year, or the next two fiscal years,” Pope told The News & Observer of Raleigh. So if the cuts can’t be credited with giving revenues an immediate jolt, what can?
April surprises
For that explanation, we turn to top fiscal analysts for the General Assembly and Gov. Pat McCrory. In their May 6 memo predicting the $400 million surplus, the legislature’s Barry Boardman and counterpart Nathan Knuffman of the Office of State Budget and Management noted that the baseline revenue forecasts had been cautious, making a surplus easier to attain.
Business income was up, Boardman and Knuffman reported, in line with the experience in other states as the national economy improved. Tax payments also spiked as investors sold assets and reaped capital gains. And tax refunds were down, in part because required levels of withholding had been decreased. The drop in refunds was larger than expected and boosted the year’s anticipated tax collections by $375 million, the two analysts said.
The ongoing forecast calls for “moderate, steady economic growth.” That will translate into further modest revenue gains as more people join the workforce and pay income taxes, and as increasingly profitable businesses likewise contribute more in tax payments.
Yet as the country continues its fitful emergence from the Great Recession, it’s hard to see anything unique about North Carolina’s positive turn – any signs that tax cuts saved our bacon.
Those cuts were geared to be most helpful to high-income earners and big businesses. Meanwhile, some taxpayers wound up taking even bigger hits. They included people, many of them elderly, with large medical expenses that no longer could be deducted, and small business owners who lost a deduction on the first $50,000 of business income.
That shifting of the tax burden has led the legislature’s minority Democrats to put a different spin on the newly scoped-out revenue surplus. In their view, the surplus shows how the tax cuts – which they opposed all along – are unfairly benefitting the well-off at the expense of ordinary folks in the middle of the income range. That’s not the sole reason for the surplus, of course, but it’s an understandable sore point when a tax-cut scheme actually has some people paying more.
Money’s still tight
The larger point has to do with how tax cuts continue to hamper the state’s ability to meet many of its challenges. Even with some extra revenue on hand, the new state budget now taking shape will be hard-pressed to come up with the money to fund adequate investment in the public schools – in particular, the raises for teachers that even many conservatives now agree are essential.
Universities are looking at further spending cuts. Mental health programs are behind the eight-ball after years of scrimping. Economic development efforts seem to be running on fumes.
Meanwhile, because of “triggers” related to revenue growth, taxes on corporate income could fall even more – to a rate of 3 percent beginning in 2017, down from the current 5 percent. And Republican leaders are eager to keep cutting personal income taxes as well.
If there were a solid cause-and-effect link between lower taxes and a juiced-up economy that in turn yielded overall growth in tax collections, then a tax-cutting policy would make sense. But even conservatives realize that government can’t whittle taxes indefinitely. Core expenses have to be met, as Sen. Berger acknowledged. If income taxes are slashed, that might mean sales taxes have to be broadened – which happens to be part of the Republican strategy, even though it puts a proportionately greater burden on the poor.
Nobody aligned with the Council of Churches wants to see taxes set any higher than necessary or so high that they throw the economy for a loop. The real debate involves how to spread the tax burden fairly, and how much has to be spent to give all North Carolinians a decent chance at good schools, good jobs, good health, safe and clean communities.
The coming weeks will see those debates continue to play out – with big implications, again, for the state’s future as a place where “the weak grow strong and the strong grow great.”
